By Sam Becker
Joe Biden seemingly has two things in its sights lately: Malarkey and junk fees.
A few weeks after the Federal Trade Commission (FTC) announced a new rule targeting junk fees—described as “hidden and bogus fees that can harm consumers and undercut businesses”—the Biden administration is zeroing in on additional extemporaneous charges.
This time, the administration is looking to crack down on retirement planners and advisers who may impose their form of “junk fees” on many American families. The proposed rules, which would be enacted through the Labor Department, would look to curtail suspected conflicts of interest that financial advisers may run into when working with clients.
“Right now, when a financial adviser provides retirement advice, they may be paid by the saver or by the firm who makes the investment product they recommend,” a White House statement reads. “Responsible retirement advisers deserve to be paid for their important work. But when a firm pays a retirement adviser more to recommend a specific investment product, that creates a conflict of interest that often leads to Americans selecting an investment product recommended to them that generates lower returns.”
The statement adds that commissions as high as 6.5% are sometimes paid to advisers who recommend specific insurance products. “When the saver pays for advice that is not in their best interest, and it comes at a hidden cost to their lifetime savings, that’s a junk fee,” the statement continues.
The White House also says that by curbing these “junk fees,” retirement savers could see an additional 20% added to their savings over a lifetime. In effect, the new rules would seemingly buttress the “fiduciary standard,” which dictates that advisers need to act in a client’s best interest when recommending certain products or services—a rule that applies to advisers offering advice or guidance on some, but not all, retirement plans.
As the White House states, some advisers may earn bigger commissions by selling or steering clients toward products that may not be ideal for a client’s specific financial situation, running afoul of the fiduciary standard.
More specifically, the proposed rules would close loopholes related to the Securities and Exchange Commission’s (SEC) Regulation Best Interest, effectively extending the fiduciary standard to more products, such as certain types of insurance, commodities, or fixed index annuities. It would likewise extend fiduciary standards to brokers or agents dealing with rollover IRAs, and to advisers working with employers or retirement plan sponsors recommending investments to include in 401(k) plans.
As for whether the rules will be enacted or have the desired effect, it’s hard to say. There have been attempts to extend fiduciary rules to financial advisers going back to the Obama administration, which have been met with opposition from the financial industry.
What is clear is that Biden feels his mission to abolish “junk fees” has momentum, and that the administration feels the rules may stand a chance at succeeding by tying them to that larger campaign.
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